A debtor must establish a substantial or undue hardship in order to receive a discharge (debt wiped out) of student loan debt in a Chapter 7 or Chapter 13 bankruptcy. Undue hardship typically means that you cannot maintain a minimally adequate standard of living and repay the loan. The rule, found in a New York bankruptcy case called Brunner vs New York Higher Education Services Corp., sets out a 3 part road map for discharging student loans in Chapter 7 bankruptcy.
- You must prove that you cannot maintain, based upon current income and expenses, a minimal standard of living for yourself and your dependents if forced to repay the loan.
- Additional circumstances must exist indicating that the state of affairs is likely to persist for a significant portion of the repayment period; and
- You must have made a good faith effort at repayment.
The definition of student loans now includes private student loans as well as the federally-guaranteed ones and most bankruptcy courts take a hard line on this test, making it extremely difficult to discharge a student loan in bankruptcy, but, in rare cases, possible.